Wednesday, June 17, 2015

CBO 2015 Long Term Budget Outlook

A new report of the Congressional Budget Office was just released. The report projects future budget deficits for the Federal Government through 2040.

The report highlights future growth in spending on Social Security and health care as two principal drivers in growing deficits. Spending on these two programs alone is expected to grow from its current level of 10.1% of US GDP to 14.2% by 2040.

With current law unchanged, the CBO projects that total federal tax revenue will grow as a percentage of GDP from 17.7% in 2015 to 19.4% by 2040. At the same time, federal spending is projected to grow from 20.5% of GDP in 2015 to 25.3% in 2040. And therein lies the rub. Expenditure growth at rates considerably in excess of that of revenues. I guess you could say the government loses money on every dollar and can't make it up on volume.

Annual budget deficits are projected to grow from 2.7% of GDP in 2015 to 5.9% by 2040. With growing deficits, the CBO forecasts that total federal debt will exceed 107% of GDP by 2040. Now this raises an important point about how various government agencies and economists measure total US debt and its relationship to GDP.

According to data of the Federal Reserve Bank, as shown in the chart above, total debt to GDP already exceeds 100%. So why is there a discrepancy in the CBO report? It's a question of whether debt is measured on a gross or net basis. Since a healthy chunk of US Treasury debt is owed to Social Security and other federal programs, like Medicare, this portion of the debt is often netted out, under the theory that "we" owe it to ourselves.

Well, perhaps, but if you are now or are expected to be a recipient of Social Security or Medicare benefits, then it's owed to you. The Social Security Trust Fund is now the world's largest holder of US Treasury obligations, some $2.7 billion of them. The CBO report projects the Trust Fund to become insolvent by 2029. In the CBO's 2008 long term outlook, Social Security was expected to remain solvent until 2050.